Key Takeaways
A financial advisor may seem less like a helpful investment tool and more like an end goal for many investors. There’s a common misconception that financial advisors are only enlisted by the wealthy. But it doesn’t matter what your investment goals are or how much money you’re investing—a financial advisor can be a fantastic resource for anyone.
“Do I need a financial advisor?” you ask. And what services does a financial advisor provide? Here’s an investor’s perspective on financial advisory services.
What Does a Financial Advisor Do?
What does a financial advisor do to help you manage your money?
A financial advisor will learn about your financial goals and devise a plan to help you reach them. Know that “financial advisor” is a broad term, and there are a variety of different types of advisors that specialize in select areas of finance.
Some investors are reluctant to consult with a financial advisor because they think they’re going to receive a cookie-cutter financial plan, like “spend less money” or “put more money in savings.” But a good financial advisor will learn all the details about your unique financial situation—your income, your assets, your expenses, and your goals—and create a plan that accounts for your financial situation and your lifestyle needs.
Here are a few goals that a financial advisor can help you reach:
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Developing a passive income
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Managing your investments
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Planning for taxes
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Saving for retirement
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Creating a rainy day fund
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1. Developing a Passive Income
Most investors strive to create a passive income. Passive income is money that you earn without having to do any daily labor. There are many ways you can build a passive income, and a financial advisor can help you pick the right way to do it.
A strong passive income:
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Provides you with significant supplemental earnings
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Provides a steady source of income (although some passive incomes are earned seasonally)
Many investors opt to invest in corporate stocks, government bonds, and index funds. A financial advisor can help you start by suggesting a good brokerage firm and recommending securities that fit your budget.
Real estate is a popular investment in the 21st Century. Most properties tend to appreciate, and rental properties can generate a substantial passive income.
A financial advisor can help you determine whether real estate investment may be a viable option for you. They can help you figure out which type of investment property would be best for you, given your budget and goals (it’s highly recommended you do some real estate training before you get started, even if you’re consulting with a financial advisor—real estate transactions are extensive, so there’s little room for error).
2. Managing Your Investments
Investors often enlist financial advisors to help them find the best securities to invest in. A financial advisor that assists you with investments is typically called an “investment manager.” The investment manager will come to understand your investment goals, budget, and risk tolerance and use those to help you find suitable stocks or bonds.
If you’re a serious investor, then you’ll want to diversify your investment portfolio. A diverse portfolio will protect you if one of your investments loses profitability, and you’ll have a better variety of short-term and long-term earnings.
Reinvestment is an important strategy that an investment manager can help you with. Savvy investors don’t simply pocket all the dividends they receive from investments—they reinvest to buy more stock. An investment manager can help you allocate your stock earnings so that you’re consistently growing your wealth.
Real estate can be a trickier asset to manage than stock because real estate profit margins can change dramatically from month to month. For example, a vacancy in a rental property could tremendously reduce your earnings. An investment manager can help you maximize the profitability of your real estate holdings.
Pro Tip: Your stock brokerage may offer financial advisory services as an additional or included feature with your account.
3. Planning for Taxes
Filing taxes is one of the most overwhelming financial activities for Americans, and it’s even more stressful if you’re an investor. You’ll have to report your assets and your earnings/losses to the IRS, which could significantly affect how much tax you pay.
Tax preparation will be a year-round activity if you’re trying to maximize your tax savings. Smart investors will try to strategically time their investments and other major financial transactions to get the best possible tax rate come tax season. A financial advisor can provide you with critical tax guidance, so you’re able to shield as much of your income as possible.
4. Saving for Retirement
Building a large retirement fund might be the main reason you’ve decided to invest. That’s what the American Dream is all about, right? A cozy retirement with a paid-off home and plenty of money set aside for travel.
A financial advisor will help you create a retirement plan that’s right for your budget. Your advisor might help you allocate your budget so that you’re contributing a steady amount of money to a lucrative retirement account, like a 401(k) or an IRA. Your financial advisor may also help you with investing so that you’re making additional money for your retirement fund (for example, index funds are often used to boost interest rates in a retirement plan).
5. Creating a Rainy Day Fund
According to BankRate, only 1 in 4 Americans has a “rainy day fund.” A rainy day fund is money you set aside in case you have a “rainy day.” If you ever lost your job or were saddled with an unexpected expense (like a huge medical bill), you’d be able to rely on your rainy day fund. You wouldn’t have to drain your checking or savings account to avoid defaulting on bills.
Unfortunately, nearly three-quarters of Americans don’t have any rainy day fund whatsoever. Quite often, the people who do have a rainy day fund haven’t contributed enough money to it. When there’s a recession or surprise job loss, those people may have to draw a significant amount of money from their savings account, so they’re able to pay rent and provide for their families. A savings account is the key to retirement, vacation, or purchasing a home, and you should never have to sacrifice it when you’re faced with a change in employment or financial hardship.
A financial advisor can help you determine how much money you’ll need to contribute to build an adequate rainy day fund (it’ll be based on your family size, expenses, income, and other factors), and they’ll help you determine which kind of account would be best for those funds. Furthermore, a financial advisor will create a contribution strategy that will enable you to quickly develop your rainy day fund without significantly affecting your budget in the short term.
Financial Advisor Vs. Financial Planning
Financial advisor is a broadly used term for any financial-management services, including financial planning. While the two phrases are not necessarily interchangeable, you may hear one mistaken for the other. Financial advisors encompass numerous areas of finance, and can be more business focused than client focused. Essentially, some financial advisors consult on one-time decisions or have other responsibilities outside of simply advising. A financial planning is more of the one-on-one financial guidance that most people picture. Planners often work with clients long-term and guide all aspects of financial health, not just investment goals.
When Do I Need a Financial Advisor?
“Do I need a financial advisor?” is a common question that investors ask. A better question might be, “Am I in a situation that warrants expert financial advice?”
Here are some common investment and life situations that cause people to seek out financial advice:
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Having difficulty managing money
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Major life changes
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Overwhelmed by financial stressors
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Opening a business
1. Having Difficulty Managing Money
There’s no shame in admitting that you’re having difficulty managing your finances. It’s something that very few people are experts at. Smart investors seek guidance when they need it.
If you have a variety of different assets, it can be difficult to evaluate your overall investment health. This is especially true if you’re a real estate investor. Earning and spending are practically simultaneous in the real estate world—you spend money on contractors, then you collect rent, then you spend money on property managers, etc. You could wind up siphoning money if you don’t keep a careful eye on your finances.
Financial advisors can help you sort out your assets to have a clear understanding of your cash flow (or lack thereof). They’ll identify which of your assets are profitable and which ones you should ditch, and they’ll also help you maximize the value of the assets you want to keep.
2. Major Life Changes
You may want to seek guidance from a financial advisor if you’ve undergone a major life event.
Marriage is a life event that may certainly warrant a financial advisor. When you get married, you’ll probably wind up merging finances with your spouse. That may be a difficult undertaking, especially if you and your spouse have wildly different credit scores, incomes, and spending habits. A financial advisor can help you and your spouse create a new financial plan that’ll ensure your financial success as a couple.
Having children is another life event that causes many people to seek a financial advisor. A financial advisor can help you create a financial plan that’ll prepare you for the expenses that come with raising a child. They can also help you prepare a college fund, and can advise you on finding good life insurance so you can make sure your family is protected if you’re gone.
3. Overwhelmed by Financial Stressors
Life is tough, and sometimes you might just get overwhelmed by all the different living expenses that burden our lives. Perhaps you’re struggling to earn a high enough income to handle all your expenses, or maybe you’re struggling to care for elderly parents. Whatever the case, a financial advisor can help you prioritize your debt, create a budget, or create a passive income. Financial advisors may also recommend government programs that can provide you with financial support or tax relief.
4. Opening a Business
A financial advisor is highly recommended if you plan on opening a business. Before you’re able to secure financing from a lender, you’ll have to draft a financial plan that details how you intend to turn a profit—a financial advisor can help you create one. A financial advisor can also help you plan a contingency plan if your business doesn’t turn a profit on schedule.
As you operate your business, a financial advisor will be able to provide key insights on ongoing expenses and improving overall efficiency. In many cases, financial advisors are even skilled at pointing out new investment opportunities or other ways to maximize profits. While you will have to pay for these services, they can be invaluable when it comes to saving money in the long run. Further, financial advisors can help manage cash flow, outside funding, and other ongoing costs.
The 3 Types of Financial Advisors
No matter what type of investor you are, there may be a type of financial advisor tailored to fit your needs. Here, we will cover the several types as well as what they do so you can better answer the questions “Do I need a financial advisor?” The 3 main types of financial advisors are:
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Traditional financial advisors
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Robo-advisors
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Online financial planning services
Traditional Financial Advisors
A traditional financial advisor is an advisor you can meet with in person. There are a few different types of financial advisors, including:
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CFP: A CPF, or, “certified financial planner,” has been certified by the Certified Financial Planner Board of Standards. A CFP will provide you with useful financial advice for a broad array of financial topics. CFPs are especially helpful if you need guidance with your finances.
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Broker/Stockbroker: A broker will help you buy assets, like securities. Typically they’ll receive a fee and/or commission on each transaction. Brokers must be certified by and registered with the U.S. Securities and Exchange Commission.
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Wealth Manager: Wealth managers are often enlisted by people who have a high net worth. They’ll help you manage assets that include properties, vehicles, and trusts.
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Registered Investment Advisor: Investment advisors give you recommendations on which securities or assets to invest in. RIAs must be registered with the U.S. Securities and Exchange Commission.
Robo-Advisors
Robo-advisors are usually the lowest-cost option for financial advice. The provider will typically have you fill out a questionnaire in which you list your investment goals, risk tolerance, and other relevant items.
Based on your information, the robo-advisor will use an algorithm to recommend a suitable financial plan or investment portfolio (often they include low-cost exchange-traded funds and index funds).
The robo-advisor may automatically manage your investments for you—for example, you can request that it automatically reinvest your dividends.
Online Financial Planning Services
An online financial planning service will offer the same basic services that you’ll get with a traditional financial advisor, but you’ll speak with your financial advisor through video conferencing or online chats rather than in person. Everything is done virtually.
Online financial planning services are convenient and lower-cost than a traditional financial advisory service, but you’ll receive the same quality guidance.
Which Financial Advisor is Right for Me?
How do you know which financial advisor is right for you? Here are a few factors that can help you decide:
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Cost: This is the most critical factor for most people who are debating about whether or not they want a financial advisor. We’ll go over costs in the next section.
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Experience: Would you rather get financial advice virtually, or would you prefer speaking to your advisor in person?
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Multiple Advisors: Do you plan on using different financial advisors for each aspect of your finances, or do you want to build a long-term relationship with a single financial advisor?
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End Goal: What is your primary investment goal? Does your goal require more detailed financial advice or less?
Generally, a robo-advisor would be a great option if you’re low on money or if you’re only doing a minimal amount of investing. Otherwise, you’ll want to go with a traditional or online financial advisor. Traditional advisors are great for long-term advisory, while online services are optimal if you’re going to be enlisting multiple types of advisors.
How Much Do Financial Advisors Cost?
Financial advisors vary dramatically in price, so it’s difficult to give an approximate cost. However, you should know that it’s possible to find an affordable and knowledgeable financial advisor even if you don’t have a lot of money to spend. You must shop for rates online and in your local area.
As mentioned before, robo-advisors are the lowest cost option for investors. Typically they’ll charge a 0.25% fee on your annual account balance.
Online financial services may charge an annual flat fee or charge hourly any time you have a virtual chat with your advisor—it depends on the service. Online financial services will charge a higher fee on your investment transactions, usually between 0.30% and 0.89%.
Traditional advisors may also charge either a flat fee or an hourly fee. Some traditional advisors require you to hold a minimum account balance, or else they won’t take you. But financial advisors that charge an hourly rate will typically take investors of all tax brackets.
Do I Need A One-Time Financial Advisor?
It is not uncommon to seek out a one-time financial advisor when necessary. In these cases you can work with the advisor for an hourly rate or flat fee, depending on the situation. For example, let’s say you have employee stock options and want to decide how to best act on them before the expiration date. In this situation, a financial advisor may be the best way to weigh all of your options adequately.
There are many situations where professional advice can guide your financial decisions. Deciding if you need a one-time advisor simply comes down to whether you feel like you can make a decision alone. The option to receive advice when needed can be an invaluable tool to keep in your back pocket.
Do I Need A Full-Time Financial Advisor?
You may prefer to work with a full-time financial advisor as your financial situation gets more complex. A full-time advisor could be extremely beneficial if you have several investment types, business ownership, or multiple properties. Not only can advisors help with asset management, but they can also guide you towards tax-forward investment strategies.
Many individuals find full-time advisors to be helpful when planning for the future, such as saving for a children’s college tuition or preparing for retirement. Financial advisors can provide advice on achieving certain financial outcomes. Typically, clients meet with financial advisors once or twice quarterly though this depends on the advisor. Fees range from a percentage of dividends to flat retainer fees.
Can I Trust Financial Advisors?
As mentioned earlier, many financial advisors need to be certified by agencies like the U.S. SEC or CFP Board. These certifications verify that the financial advisor has a certain required amount of expertise and meets appropriate educational and ethical standards.
Always research a financial advisor before you open an account. You can use a free service like BrokerCheck to examine a financial advisor’s qualifications before you reach out to them. Here are a few red flags to look for as you consider who to work with:
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Lack of Responsiveness: Financial advisors should be available to answer your questions, especially as you establish your relationship. Be wary of advisors who regularly ignore or avoid your messages, as this could signal they do not have the time to adequately manage you as a client.
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Unclear Planning: When working with an advisor, you should be aware of their plans for your portfolio. You never want to put your trust is someone who provides vague answers or ideas — after all this is your money on the line.
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Bad Investment Advice: You should be able to trust the advice of your financial advisor. Don’t be afraid to do some of your own research and question areas you find concerning.
Summary
A financial advisor is a great resource for any investor who’s seeking to boost their profits, better manage their investment portfolio, or make major life changes. The three main types of financial advisors include traditional financial advisors, robo-advisors, and online financial planning services. When asking yourself “Do I need a financial advisor?” your investment goals and budget will help you determine which type is right for you.
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